© Copyright Reserved Serial No……………… Institute of Certified Management Accountants of Sri Lanka Level 5 – May 2013 Examination

Examination Date : 12 th May 2013 Number of Pages : 16 Examination Time: 1.30 p:m. – 4.30 p:m. Number of Questions: 07

Instructions to candidates: 1. Time allowed is three (3) hours. 2. Attached to the question are Scenario I given in advance and Scenario II 3. The answers should be given in English language .

Subject Subject Code Integrative Case Study (ICS - 405)

Question (100 Marks)

Prospects of Fraser & Neave Limited and Takeover

You are required to:

1. Assess the probability of success of the strategy of penetration into Indochina region of which most of the countries adopted market economy in the recent past. (10 Marks)

2. Critically examine the possible issues that F&N would face in relations to good governance. (10 Marks)

3. Assess the impact of likely delisting of F&N by SGX on Mr. Charoen, other shareholders and other stakeholders. (15 Marks)

4. Business is likely to be more competitive and sophisticated in the future and therefore one of the key success factors would be the ability to meet varied customer needs by offering a broader portfolio of products.

Prepare a report to be presented to the new board on the capability, risks associated with and limitations of F&N with respect to dairy sector in achieving the objectives of winning new customers and maintaining the customer loyalty intact. (15 Marks)

5. Prepare a report to be presented to the new board on a SWOT analysis of property sector by paying special attention on future growth and the strategy of locking raw materials. (15 Marks)

6. Prepare a report to be presented to the Board on the value of F&N based on the financial figures available, estimates and any other suitable assumptions that you like you make. (15 Marks)

7. Discuss on appropriate corporate strategies that should be adopted by the management of F&N to gain competitive advantages in future with respect to each business sector. (20 Marks) (Total 100 Marks)

Institute of Certified Management Accountants of Sri Lanka 1 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination

Prospects of Fraser & Neave Limited and Takeover

Scenario I

Introduction

Southeast Asian companies have become more active in mergers and acquisitions in the recent past. It was the financial news around the world that major shareholders were trying to gain the control of Fraser & Neave Limited (F&N), a well established group of companies mainly in the businesses of food & beverages, Properties and Printing and Publication. Mr. Charoen, a major shareholder of Thai Beverage Public Company Limited (Thai Beverage) showed the interest of acquiring F&N by convincing other major shareholder: Japan's Kirin Holdings company that had 15% stake in F&N. Mr. Charoen's offer price was 4.3% above the closing price of $8.51 when the offer was made. Prior to this, Overseas Chinese Bank Nominees Pte Ltd (OCBC) Group and Lee Rubber Company (Pte) Limited (“Lee Rubber”), other two major shareholders of F&N agreed to sell their combined stake of 22% in F&N at a price of $8.88 and 8.6% stake in Asia Pacific Breweries Limited (APBL) at $45 per share, to Thai Beverage Public Company Limited and Kindest Place Groups Limited respectively.

Heineken NV offered $50 per share for F&N’s direct and indirect stakes in APBL and $163 million for non-APBL assets in Asia Pacific Investment Pte Ltd (APIPL) in July 2012. During the month of August 2012, F&N Board announced the recommendation for sale of direct and indirect stakes in APBL to Heineken NV, at an improved offer of $53 per share (Total consideration of $5.6 billion) and non-APBL assets in APIPL for $163 million thus divesting a substantial part of its beer business. APIPL was the 50:50 joint venture company through which F&N and Heineken held their joint 64.8% interest in APBL.

The share price of F&N was affected by this tense situation irrupted due to of takeover bids and the changes in other socio economic factors. As a result, market price of shares of F&N fluctuated during the year 2012. Share price of F&N fell as the market digested news of Heineken's final offer to acquire its stake in APBL. Heineken and F&N were the two largest shareholders in APBL. Subsequently, F&N sold its entire 39.7% stake in APBL to Heineken by registering a gain of around $4.8 billion. As a result, Heineken's direct and deemed interest in APBL has gone up to 84.24%. Subsequent to this, Group’s beer portfolio now consists of a 55%-held brewery in Myanmar Brewery Limited (MBL) in Myanmar. MBL manufactures and sells Myanmar’s leading beer brands such as Myanmar Beer, Myanmar Double Strong and Andaman Gold. However, the Myanmar government issued several new beer licenses to other companies in the year thus creating another challenge that would be likely to be faced in future. Hence, a capacity upgrading plan was completed with a new high-speed bottling line installed during the year.

In connection with the takeover bid offered by Thai Beverage, other giant investors also launched takeover bids. Accordingly, TCC Assets Limited launched a mandatory conditional cash offer at $8.88 per share of F&N in September 2012 followed by another voluntary conditional cash offer by Union Enterprise Limited (OUE) to buy shares of F&N at $9.08 per share. The battle of taking the control of F&N ended in February 2013 by giving more than 90% of stake to the Thai businessman, Mr. Charoen through Thai beverage.

Brief History of F&N

F&N was established in 1883 and commenced its operations in food and beverage industry and. It is driven by the philosophy of providing pure enjoyment and pure goodness to consumers by fulfilling their health and wellness needs. The vision of F&N is to be a world-class multinational enterprise with an Asian base, providing superior returns with a focus on Food & Beverage , Properties and Publishing & Printing businesses. Operations are carried out with many fully owned subsidiaries (Both listed and unlisted), joint ventures and associate companies as exhibited in the group structure given in figure 1. F&N is now operating over 20 countries with a workforce of more than 17,000 people.

Through the years, F&N has built a strong portfolio of brands known for their refreshing tastes and nourishing goodness, a regional network of manufacturing plants and sales and distribution channels, and most importantly a sound reputation as one of the region’s leading Food and Beverage producers. F&N holds the number 1 position in Malaysia for soft drinks, and maintains key positions in dairies and beer segments in this region. The position of brand image was further validated as F&N took the top spot in the Food & Beverage category in the 2012 Malaysia’s Most Valuable Brands awards competition.

Institute of Certified Management Accountants of Sri Lanka 2 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination The soft drinks division maintained the focus by vigorously defending on its leading position despite the emergence of a partner (The Coca-Cola Company-TCCC) turned a competitor. The F&N ended its licensing partnership with TCCC in Singapore, Malaysia and Brunei. This transformative step created challenges for the group to better place its own products in a competitive environment. Accordingly, the efforts were made in marketing activities and boosted investment in research and development facilities to expand products.

The core soft drinks brands led by 100 PLUS continued to lead the overall soft drinks category with a volume expansion of about 12% to 57.3 million cases from 51.2 million cases in the year 2012 with an additional sales boost coming from Brunei. Strong performances from F&N SEASONS brand in the Asian Soft Drinks category powered the growth performance from “F&N Clearly Citrus”, a new entrant in the lemon- lime segment.

Initially, F&N manufactured soft drinks and later on ventured into brewing beer in 1931 followed by dairy operations started in 1959. It started manufacturing glass bottles needed for its food and beverage section in 1972. By further diversifying its operations, F&N started property development and management in 1990 and then moved to printing and publishing business in the year 2000. F&N was subsequently listed on Singapore Stock Exchange and at present, F&N is among the top 25 listed companies on the Singapore stock exchange.

Overshadows of continuing Euro debt crisis, recent region’s economic and political uncertainties and operational problems slowed down the growth of F&N in the year 2012. The financial year 2012 began without the business from Coca-Cola, a business partner for 73 years due to the expiration of licensing agreements. As a result, revenue and the profit for the year 2012 were lower when compared to the previous year.

The revenue was further affected due to temporary cessation of production at flood-hit Dairies Thailand (A subsidiary) though it was possible to bring the operations back to normal due to prompt actions taken and the commitment of the management. Diaries Thailand maintained its supply pipeline via importation and managed to sustain its market position despite the floods thus generating 79% of expected revenue even the factory was shut down for 55 days. Dairies Thailand returned to full production by June 2012, and the division was rewarded for its resilience and commitment when it achieved complete recovery to resume full production one month ahead of the schedule. The Thai Food and Drug Administration awarded Dairies Thailand a certificate of recognition for being the fastest to recover and its outstanding achievement in teamwork and strength.

Table 1: Group Structure of F&N Food and Beverage Property Publishing and Other Printing Fraser & Neave Holdings Bhd Frasers Centre point Times Publishing Other Unlisted ∗ 23 Subsidiaries Group Group Companies ∗ 1 Associate ( Cocoaland Holdings Berhad) ∗ 166 Subsidiaries ∗ 43 Subsidiaries ∗ 7 Subsidiaries Other Listed & Unlisted Companies ∗ 16 Joint ventures ∗ 2 Joint ventures V F&N ∗ 12 Subsidiaries ∗ 6 Associates ∗ 4 Associates Investments V Asia Dairies Listed companies Listed companies V F&N Services V F&NBev Manufacturing ∗ Frasers Centre point ∗ Fung Choi Media V F&N Treasury V F&N Dairy Investments Trust Group V Fannet Online V F&N Foods ∗ Frasers Commercial ∗ PMP Limited V Fraser & Neave V F&N United Trust (Singapore) V F&N Interflavine Unlisted Company V Fraser & Neave V Magnolia – PDL Dairies ∗ Vacaron Company Investments V Myanmar Brewery (HK) V Red Lion Holdings V International V Tiger Taverns Theme Parks V PT F&N Indonesia (Singapore) V F&N Creameries Group 4 Subsidiary companies

∗ 1 Joint venture with Asia Pacific Investment ∗ Asia Pacific Breweries Group 66 Subsidiaries, 4 Joint ventures 2 Associates ∗ Heineken-Asia Pacific Breweries 7 Subsidiaries, 1 Joint venture

Institute of Certified Management Accountants of Sri Lanka 3 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Operations in Food and Beverage Section

Soft drinks and dairies business, with operations and investments in Singapore, Malaysia, Thailand, China and Vietnam, are operated primarily through Fraser & Neave Holdings Bhd; while Beer business is operated mainly through Asia Pacific Breweries Limited (APBL), in 37 breweries in 14 countries in the Asia Pacific region. The product portfolio comprises of F&N Nutrisoy, 100PLUS, F&N SEASONS, F&N Magnolia milk, F&N Fruit Tree Juices, F&N Ice Mountain, F&N aLIVE yoghurt, NutriTea and a range of F&N sparkling drinks for the soft drinks and dairies. Tiger, Anchor, Baron’s and ABC are the major brands for Beer section. F&N has been awarded with many accolades including HACCP accreditation since 2003.

Soft drink operation transformed into a highly competitive environment, following the entry of a former partner, Coca- Cola which turned to be a competitor. As a result, measures were taken to energize the marketplace by improving touch points to improve product availability, cold equipment services, merchandising intensity, increasing depth of inventory and selling space. Despite the challenges faced, the strength built over 129 years helped F&N to grow volume and revenue by 12% and 10% respectively. A year after the separation with Coca-Cola, the division has grown ahead of the market with volume growth in almost all categories.

100PLUS continued to be a mainstay at all major sporting events as the preferred isotonic beverage. Malaysians from all walks of life rallied to support the national contingent to the London Olympics in the 100PLUS Road to London Campaign. In conjunction with the campaign, national celebrity athletes including Datuk Lee Chong Wei, Pandalela Rinong, Khairul Fahmi Che Mat and Safee Sali were signed on as 100PLUS ambassadors.

F&N Clearly Citrus was introduced in November 2011 to complement the current exciting flavoured soft drinks line up. Major towns across Malaysia were invaded by F&N Clearly Citrus agents in bright yellow and green outfits, displaying the refreshing sight of lemons and limes.

Soft Drinks division extended its leadership positions in the F&B industry with new products armed with well- established brands like the 100PLUS isotonic drink, F&N Sparkling Drinks, F&N SEASONS Asian-inspired drinks and teas, as well as the F&N ICE MOUNTAIN water range. 100PLUS EDGE was introduced at the beginning of the year to herald the division’s efforts to offer more choices and to drive new and differentiated products across the soft drinks portfolio. While maintaining the growth in key markets of Singapore, Malaysia and Thailand, new ASEAN markets are also expected to grow in dairy business.

Properties

Properties section is operated by a Frasers Centrepoint Limited (FCL), a wholly owned subsidiary. F&N started its operations with a single shopping mall and has stretched its operations into businesses of property development, property investment, running serviced residences and maintaining investment funds in Australia, China, Japan, Hong Kong, Korea, New Zealand, Philippines, Thailand, UAE, Vietnam and the UK. In 2012, the Malaysian property market continued its growth but at a slower pace compared to 2011. The housing sector continues to be the primary driver of the Malaysian property market while residential property development continued at an active pace with good sales returns amidst rising prices of those properties. For the year ahead, the property market is expected to present a more challenging landscape in view of continuous construction cost pressures and new projects coming into the market.

Take-up rates for residential units in Singapore were encouraging in the year 2012 despite some cooling measures implemented by the Singapore Government. FCL launched four projects and sold 3,047 units during the current year and remains one of Singapore’s top three developers in terms of number of private non-landed residential (including Executive Condominium) units sold.

The entire interest in Frasers Property China Limited (FPCL), a subsidiary of FCL was sold during the year. In Australia, strong pre-sales of about 580 units was recorded in the year 2012. During the year, Frasers Commercial Trust (FCOT) acquired the remaining 50% interest in Caroline Chisholm Centre in Canberra and successfully unlocked value in the Key point which was divested at a gain of $73 million. In October 2012, FCOT completed its portfolio reshaping strategy which began two years ago, when it divested its remaining Japanese portfolio by focusing on its portfolios in Singapore and Australia.

Institute of Certified Management Accountants of Sri Lanka 4 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination However, the revenue from properties section dropped during the year partly because of changes in accounting policy as a result of adoption of IFRs. Under this new rule, earnings of overseas and certain Singapore residential developments are recognized only upon completion, and not according to construction progress. Consequently, despite achieving strong pre-sales of private residential units in Australia and China as well as executive condominium units in Singapore, such revenue and profit were not recognized in the year 2012. Specifically, earnings of the 573-unit Esparina Residences (99% sold), an executive condominium in Singapore, and phases 1 and 2 of the mixed-use Central Park project in Australia (74% sold) would only be recognized upon construction completion in the coming financial year. On the other hand, development property earnings were lifted by a $68 million gain from the Group’s sale of its 50% stake in the mixed-use Central Park project in Australia to Sekisui House Ltd.

Singapore’s residential market remained resilient despite economic uncertainties and the government’s effort to cool the property market. The first nine months of 2012 saw primary home sales totaling 17,927 units, up 12.7% from 15,904 units in 2011 and about 10% in 2010. It has been estimated that the aggregate residential sales in 2012 is between 20,000 and 23,000 units. Overall, private home prices rose by 0.6% in 2012 indicating the highest increase this year.

Even though Singapore office market is concerned about the Eurozone debt crisis and is propensity to slow the growth momentum, the group managed to maintain it’s grow as expected. Suppressed leasing activities could be seen among large space occupiers including major banks and financial institutions, as they remained cautious of the economic uncertainties. It was observed that the majority of the take-ups in the last quarter of the year were of Grade A office spaces of less than 20,000 square feet. The City Hall/Marina and Raffles Place/New Downtown micro- markets saw the biggest jump by 2.6% and 1.7% respectively during the quarter. The city fringe micro-market continued to enjoy the highest occupancy at 98.7%, whilst the Orchard Road micro-market experienced the lowest rate at 87.4% as at end of September 2012. In general, the overall improvement in occupancy rate of Grade A office space in Singapore has helped moderate rental decline for two consecutive quarters. On the other hand, the retail property market in Singapore stayed buoyant with the opening of new malls, stores and restaurants.

Renowned F&B entrepreneurs and international brands are still looking for viable locations in new and existing malls to establish their presence in Singapore. As a result, retail rents in both Orchard Road and Regional Centres (suburban residential estates) have been steady. The monthly prime rents in Orchard Road at the end of September 2012 remained unchanged from the previous quarter staying firm at $31.60 per square foot, whilst the average monthly gross rent of prime space in suburban stabilized at $29.75 per square foot per month. Meanwhile, the hospitality sector continued to see positive demand in 2012, boosted by strong visitor arrivals as well as new setups by regional headquarter offices in Singapore. In general, occupancy rates for serviced residences in Singapore are stronger than for hotels, clocking an average occupancy of 91.8% in 2012 against an average of 86% for hotels.

Publishing & Printing Times Publishing Limited is the largest publishing and printing company in Singapore. It comprises of publishing, printing, direct sales, distribution and retailing of books, magazines and the provision of educational services and operated through a global network established in South-East Asia, Hong Kong, China, Japan, Australia, Europe and the USA. During the year under-performing Library reference business in the US was discontinued with a view to focus on Education Publishing which has gained strong growth. A new office in Chile was recently set up to drive the growth in education publishing business in Latin America.

Times Publishing Group’s revenue grew by 1% driven mainly by strong growth in Education Publishing and increased contribution from the distribution of lifestyle products amidst a decline of print demand from Western markets and weak retail sentiments. During the year, Education Publishing delivered a stellar performance with double-digit growth in revenue and PBIT. The success was underpinned by investment foresight and proactive management of the education publishing unit to improve both revenue and earnings. Overseas sales grew from 49% to 62% of total education revenue over the last three years, as Education Publishing continued to gain momentum in international market.

Institute of Certified Management Accountants of Sri Lanka 5 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination The Group continued to face challenges in the Printing business as the print volume in Western markets declined. However the efforts to diversify our revenue base to non-publishing segments and to increase our market shares from domestic markets in Malaysia and China registered positive results. In the year, Times Printers embraced digital opportunities by launching a host of digital services such as e-book conversion, app development and QR (Quick Response) codes to seamlessly integrate print and web requirements of customers. An affirmation of superior quality was displayed as Times Printers once again garnered recognition by winning numerous international awards. Distribution division, achieved improvement in revenue through the diversification to lifestyle products and expansion of its distribution network for non-book customers in Singapore, Malaysia and Hong Kong. Even though there were closures of major bookstores in Singapore.

Distribution Network F&N maintains an unparalleled nationwide distribution system to ensure the pervasiveness of brands and products in marketplaces and townships. In addition, the partnership with a strong network of distributors ensures the flow of deliveries, stocks and inventories to combined operation and service of 90,000 outlets. Apart from doubling the investments in the installation of coolers, the F&N Partner Rewards program was enhanced with emphasis on strengthening partner relationships. Partner loyalty reflects the division’s commitment in helping them transform alongside F&N while establishing greater equity and pride in being an F&N distributor.

With an established and demographically-organized distribution network, the division is able to position products in the marketplace and effectively gain insight into trends relating to on-ground market activities. Information technology was a major enabler in advancing product and cooler penetration. The investment in 3G-enabled hand held computers facilitated the provision of real time data processing and marinating the intelligence by helping the division to respond faster to the market. Food and Beverage section in Malaysia harnessed the strength of employees from across the Group to transform and reenergize the market in a four-day merchandising blitz. Over 600 employees across the Group covered 2,800 outlets in Peninsular Malaysia to execute in-outlet merchandising thereby increasing F&N brand presence. F&N products are available in 90% of the outlets nationwide making F&N brands the most pervasive among FMCG products distributed in Malaysia itself.

Over time, with the experience and tacit knowledge gained, Food Beverage section of F&N regained control of all aspects of its soft drinks business, from manufacturing and marketing to sales and distribution. F&N Foods Pte Ltd, a subsidiary of F&N became the sole distributor of all F&N beverages in Singapore and Malaysian-listed subsidiary, Fraser & Neave Holdings Bhd., covers Malaysia and Brunei distribution. This new structure allowed F&N to aggressively push marketing and sales activities for all F&N beverages regionally as the Group consolidating position as one of ASEAN’s leading F&B players.

New investment in Diaries Malaysia After 52 years, plant at Dairies Malaysia was transformed to the state-of-the-art of technology with integrated cannery, processing and filling facility and now it operates the most advanced technologies in canned milk production with the move of its manufacturing facility. Manufacturing plant now operates in a 37.4 acre site within the Selangor Halal Hub. Further, it enhanced capabilities and capacity and reinforced the plant to have ‘Halal’ credentials by aiming relatively untapped markets of the Middle East, Africa and Indonesia. Investments in technology continue to be a primary enabler to optimise efficiencies and output for faster response across the extensive distribution network.

The commercial production capacity of the new plant is 1.5 million cans per day. Technology has been incorporated to implement just-in-time supply of cans by connecting Warehouse Distribution Centre is equipped with automated storage and retrieval systems (ASRS) that amongst other things enables better inventory control and tracking, increased workplace safety and most significantly, produce major savings in inventory storage costs by creating greater storage density. Further, it incorporates heat recovery and integrated wastewater treatment process for pollution controls. Immediate benefits of the new plant include the introduction of a new nitrogen filling process, improved controls on viscosity of products and even better hygiene and quality processes. The half-tray packaging capability available at the plant ensures greater visibility of finished product and promotes better handling while reducing the use of packaging material. Dairies Malaysia plant is accredited with ISO 9001:2008, ISO22000:2005, HACCP Codex and MS 1480 certification to validate its high standards of manufacturing and food safety.

Institute of Certified Management Accountants of Sri Lanka 6 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Corporate Governance The Company is fully committed to good corporate governance practices and fair dealings in all its activities by aligning with the principles and best practices. Board comprises of 9 directors and six subcommittees namely Group Executive, Food & Beverage Committee, Risk Management, Audit, Nominating, and Remuneration & Staff Establishment Committee. All the nine directors are non-executive directors and an independent non-executive Chairman heads the Board. A formal evaluation process has been implemented to assess the effectiveness of the Board and this is conducted by an external consultant. The Board’s ratings were especially noteworthy in the areas of corporate social responsibility.

To strengthen corporate governance, the Board of Directors has adopted the Singapore Exchange Listing Ruling, which requires companies listed on the Singapore Stock Exchange (SGX) to have a robust and effective system of internal controls that address financial, operational and compliance risks.

Working Culture

Adequate investment is made to provide necessary training for employees on continuous basis. Recognizing the importance of diversity in cultivating agility and creativity in the workplace, knowledge sharing initiatives across the organization have begun with inter-placements of key senior managers in the soft drinks and dairies division. Traditional hierarchy barriers are broken down with the introduction of an enterprise social network that promotes employee interaction and collaboration on a social platform. It is intended to cross-fertilize of talents contributing to the skills of human capital.

Executives’ Share Option Scheme The ESOS which was established in October 2007 is in operation. Details of all the options granted to and exercised by executives are given in table 2.

Table 2: Number of share options given and exercised in ESOS

The fair value of share options granted as at the date of grant is determined using the binomial valuation model taking into account the terms and conditions upon which the options were granted. The inputs to the model used are given in table 3 below.

Table 3: Inputs used valuation model

Institute of Certified Management Accountants of Sri Lanka 7 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Financial Information Selected financial information of F&N for the last five years is given in figures 1, 2 and 3 below.

Figure 1: Financial performance

Year ended 30 September FY2008 FY2009 FY2010 FY2011 FY2012 Note

1 Profit statement ($ millions)

Revenue 4,990 5,146 5,697 6,355 5,570 Profit before taxation

- before interest 766 799 1,071 1,177 952 - before impairment, fair value adjustment & exceptional items 701 737 1,009 1,123 868 - after exceptional items 737 614 1,172 1,438 1,239 Attributable profit

2 - before fair value adjustment & exceptional items 372 462 584 643 472 - after exceptional items 436 357 728 898 836 Balance sheet ($ millions)

3 Net asset value 5,283 5,585 6,143 6,843 7,591 Total assets employed 13,526 13,868 13,523 13,924 14,651 Long-term borrowings 3,355 3,608 2,666 3,216 2,972

Market Capitalisation ($ millions) at close of business on then first trading day after preliminary announcement of results 4,308 5,408 9,127 8,745 13,355

1 Financial ratio (%) Return on average shareholders’ equity - profit before impairment, fair value adjustment & exceptional items 13.4 13.6 17.2 17.3 12.0 2 - attributable profit before fair value adjustment & exceptional items 7.1 8.5 10.0 9.9 6.5

4 Gearing ratio - without non-controlling interest 83.3 65.5 46.8 34.5 29.8 - with non-controlling interest 68.6 54.7 41.4 30.8 27.4

1 Per share Profit before impairment, fair value adjustment, taxation and exceptional items (cents) 50.5 53.0 72.2 79.8 61.1

Attributable profit (cents) (basic) - before fair value adjustment and exceptional items 26.8 33.2 41.8 45.7 33.2 - after exceptional items 31.4 25.7 52.1 63.8 58.9

3 Net asset value ($) 3.80 4.01 4.38 4.85 5.31 Dividend - net (cents) 13.5 13.5 17.0 18.0 18.0 5 - cover (times) 2.0 2.5 2.5 2.5 1.8

Stock exchange Prices ($) at close of business on the first trading day after preliminary announcement of results 3.10 3.88 6.51 6.20 9.35

Institute of Certified Management Accountants of Sri Lanka 8 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Figure 2: Balance sheets as at 30 th September 2012 (in $’000) The Group The Company 2012 2011 2010 2012 2011 (Restated) (Restated) SHARE CAPITAL AND RESERVES Share capital 1,499,32 9 1,417,404 1,374,502 1,499,329 1,417,404 Treasury shares (23) - - (23) - Reserves 6,092,150 5,425,965 4,707,223 2,840,319 2,755,660 7,591,456 6,843,369 6,081,725 4,339,625 4,173,064 Non -Controlling Interest 663,048 831, 204 803,055 - - 8,254,504 7,674,573 6,884,780 4,339,625 4,173,064 Represented by: NON -CURRENT ASSETS Fixed assets 747,447 1,188,098 1,104,216 - - Investment properties 2,837,7 87 2,476,740 2,139,026 - - Subsidiary companies - - - 3,829,665 3,676,408 Joint venture companies - 60,101 89,839 - 434,421 Associated companies 1,495,514 1,382,200 1,355,249 82,383 82,383 Intangible assets 163,475 569,609 576,219 - - Brands 30,3 37 73,519 74,275 212 - Other investments 374,978 404,583 323,531 8,877 8,672 Other receivables 83,970 65,212 61,556 - - Other assets 42,400 41,000 41,000 - - Deferred tax assets 38,700 14,649 25,251 - - TOTAL NON -CURRENT ASSETS 5,814,608 6,275,711 5,790,162 3,921,137 4,201,884

CURRENT ASSETS Properties held for sale 4,441,491 4,254,487 4,488,047 - - Inventories 265,936 373,497 391,916 - - Trade receivables 551,668 961,457 1,021,283 - - Other receivables 132,439 317,142 252,327 24 316 Subsidiary companies - - - 16,552 50,898 Joint venture companies 1,662 6,117 6,540 - - Associated companies 13,122 13,181 10,798 - - Short -term investments 60,448 3, 604 3,429 - - Bank fixed deposits 604,112 1,180,935 1,274,626 64,489 98,566 Cash and bank balances 1,044,833 418,672 424,290 91,793 1,002 7,115,711 7,529,092 7,873,256 172,858 150,782 Assets held for sale 1, 720,659 119,542 38,262 434,421 - TOTAL CURRENT ASSETS 8,836,370 7,648,634 7,911,518 607,279 150,782

Deduct: CURRENT LIABILITIES Trade payables 529,751 673,442 724,740 - - Other payables 905,456 1,012,643 1,013,210 8,338 5,125 Subsidiary companies - - - 17,823 5,164 Joint venture companies 3 14,263 6,350 - - Associated companies 1,787 3,043 954 - - Borrowings 936,296 747,546 1,908,709 - - Provision for taxatio n 176,739 310,240 295,603 12,244 18,961 2,550,032 2,761,177 3,949,566 38,405 29,250 Liabilities held for sale 690,111 38,292 2,297 - - TOTAL CURRENT LIABILITIES 3,240,143 2,799,469 3,951,863 38,405 29,250

NET CURRENT ASSETS 5,596,227 4,849,165 3,959,655 568,874 121,532

Deduct: NON -CURRENT LIABILITIES Other payables 38,630 39,251 15,577 - - Borrowings 2,971,647 3,215,900 2,666,032 150,000 150,000 Provision for employee benefits 17,346 20,405 25,044 - - Deferred tax liabilities 128,708 174,747 158,384 386 352 3,156,331 3,450, 303 2,865,037 150,386 150,352

8,254,504 7,674,573 6,884,780 4,339,625 4,173,064 Institute of Certified Management Accountants of Sri Lanka 9 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Figure 3: Cash Flow Statement for the year ender 30th September 2012

The Group 2012 2011 ($’000) ($’000) (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation and exceptional items from continuing operations 798,491 926,087 Profit before taxation and exceptional items from discontinued operations 411,423 337,189 Profit before taxation and exceptional items 1,209,914 1,263,276 Adjustments for: Depreciation of fixed assets 130,439 119,615 Impairment of fixed assets and intangible assets 15,513 4,921 Impairment reversal of fixed assets and intangible assets (1,569) (2,213) Fixed assets and intangible assets written off 56 983 Provision for employee benefits 4,568 2,237 Write back of provision for employee benefits (348) (2,907) Allowance for foreseeable losses on properties held for sale (net) 34,751 12,034 Loss on disposal of fixed assets 2,462 3,100 Amortization of brands and intangible assets 17,655 21,223 Amortization of deferred income - (8,005) Interest income (21,875) (17,623) Interest expenses 82,814 52,922 Share of joint venture companies’ profits (16,245) (17,342) Share of associated companies’ profits (60,838) (51,937) Investment income (18,076) (11,549) Profit on properties held for sale (281,936) (488,407) Employee share-based expense 21,140 41,696 Fair value adjustment of financial instruments 8,505 (2,471) Fair value adjustment of investment properties (341,585) (140,057) Loss on disposal of financial instruments 18,664 16,647 Operating cash before working capital changes 804,009 796,143 Change in inventories (36,531) 7,362 Change in receivables 175,448 (220,877) Change in joint venture and associated companies’ balances (11,002) 8,664 Change in payables 20,024 30,454 Progress payment received/receivable on properties held for sale 1,467,107 2,460,962 Development expenditure on properties held for sale (1,376,111) (1,600,099) Currency realignment (1,564) (3,925) Cash generated from operations 1,041,380 1,478,684 Interest income received 16,989 17,623 Interest expenses paid (79,107) (54,795) Income taxes paid (310,460) (267,182) Payment of employee benefits (2,884) (3,313) Payment of cash-settled options (7,018) (25,690) Net cash from operating activities 658,900 1,145,327

Institute of Certified Management Accountants of Sri Lanka 10 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination CASH FLOWS FROM INVESTING ACTIVITIES Dividends from joint venture and associated companies 89,949 71,773 Investment income 18,076 11,549 Proceeds from sale of fixed assets and assets held for sale 3,487 15,660 Proceeds from disposal of associated companies 37,603 97,957 Proceeds from sale of other and short term investments 703 294 Proceeds from disposal of intangible assets 1,688 - Proceeds from disposal of subsidiary companies 55,946 28,748 Proceeds from sale of investment properties - 54,654 Purchase of fixed assets and investment properties (265,825) (348,773) Purchase of other investments - (17,401) Acquisition of non-controlling interests in subsidiary companies (4,054) (7,584) Payment for intangible assets and brands (18,512) (15,799) Development expenditure on investment properties under construction (53,232) (228,813) Investments in associated and joint venture companies (22,234) (37,412) Acquisition of subsidiary and joint venture companies (146,794) (27,086) Repayment of loan from an associated company 9,607 - Additional trade advances 1,643 663 Net cash used in investing activities (291,949) (401,570)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from/(Repayment of ) term loans and bank borrowings 323,522 (709,944) Proceeds from issue of bonds - 300,000 Purchase of treasury shares (8,093) - Proceeds from issue of shares: -by subsidiary companies to non-controlling interests 21,482 20,682 -by the Company to shareholders 65,236 35,072 Payment of dividends: -by subsidiary companies to non-controlling interests (163,018) (206,826) -by the Company to shareholders (255,527) (253,381) Net cash used in financing activities (16,398) (814,397)

Net increase/(decrease) in cash and cash equivalents 350,553 (70,640) Cash and cash equivalents at beginning of year 1,597,635 1,695,123 Reclassified to assets held for sale (279,312) (1,383) Effects of exchange rate changes on cash and cash equivalents (21,399) (25,465) Cash and cash equivalents at end of year 1,647,477 1,597,635

Cash and cash equivalents at end of year comprise: Cash and bank deposits 1,648,945 1,599,607 Bank overdrafts (1,468) (1,972) 1,647,477 1,597,635

Analysis of acquisition and disposal of subsidiary and joint venture companies Net assets acquired: Fixed assets 12,616 12,135 Investment properties 266,688 - Other non-current assets 213 4,211 Current assets 14,155 16,498 Bank Borrowings (82,692) (103) Non-current liabilities (23,965) (9,249) Current liabilities - (2,315) Non-controlling interests (471) (831) Cash 12,340 7,036 198,884 27,382 Investment in associated company previously accounted for (43,878) -

Institute of Certified Management Accountants of Sri Lanka 11 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Goodwill on acquisition (net) 18,306 6,740 Consideration 173,312 34,122 Contribution of capital by non-controlling interests (14,178) - Cash and cash equivalents of subsidiary and joint venture companies (12,340) (7,036) Cash outflow on acquisition net of cash and cash equivalents acquired 146,794 27,086

Net assets disposed: Fixed assets (278) (228) Investment properties (235,402) - Properties held for sale (303,213) - Other non-current assets (1,421) (2,079) Current assets (3,028) (169,693) Non-current liabilities 222,621 1,510 Current liabilities 77,215 62,591 Non-controlling interests 191,455 7,933 Cash (205,675) (4,002) (257,726) (103,968) Realization of translation difference (34,632) 5,498 Provision for cost of disposal (100) - Fair value of retained interest reclassified to investment in associated company 69,316 - Consideration satisfied by other receivable - 84,352 Gain on disposal (38,479) (18,632) Consideration received (261,621) (32,750) Less: Cash of subsidiary companies disposed off 205,675 4,002 Cash inflow on disposal net of cash and cash equivalents disposed (55,946) (28,748)

Some details of properties currently under development are given in figure 4, 5 and 6

Institute of Certified Management Accountants of Sri Lanka 12 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Figure 4: Properties under Development – Singapore

Institute of Certified Management Accountants of Sri Lanka 13 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Figure 5: Properties under Development –Australia

Figure 6: Properties under Development –China

Institute of Certified Management Accountants of Sri Lanka 14 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination Growth Drivers

Underlying fundamentals of F&N’s connected with the strategic path for the future growth of businesses, the following value drivers have been identified in generating value for shareholders in a responsible and sustainable manner. 1. Forging strategic business partnerships and networks to gain entry and build our foundation in new markets & Printing businesses. 2. Leveraging our strong global network to expand our market reach and tap on new business opportunities. 3. Harnessing R&D to enhance our innovative edge and deliver quality products in line with current lifestyle trends. 4. Grooming leaders and developing staff systematically to ensure a continuous pool of talent. 5. Sharpening capital management and extracting operational efficiencies to enhance shareholder return. End of Scenario I

Scenario II – A continuation of Scenario I

After the battle over acquiring the F&N, Mr. Charoen now holds more than 90% of equity of F&N. This situation has created a threat to all other stakeholders as Singapore Stock Exchange (SGX), by referring to current listing rules can delist the company on the ground that one shareholder owns more than 90% of equity of a company. Since this may cause problems on the future growth and successes of F&N, Mr. Charoen has already initiated discussions with SGX to explore the possibilities of keeping F&N listed. As an initial measure Mr Charoen, now being the chairman of F&N appointed four independent directors, including former Singapore ambassador to Thailand and former Jardine Cycle & Carriage boss Philip Eng, to the nine-man board by signaling that necessary balance in the board is maintained to assure the public interest. The chairman also intends to use F&N’s regional networks to further raise his profile outside Thailand. His hotel businesses which have well spread throughout the world, including the Plaza Athenee in Manhattan and the Intercontinental in Singapore will also would be eyeing to form a real estate investment trust (REIT) by spinning off these properties together with F&N’s serviced apartment arm.

Management expressed the intention of expanding its soft drink and dairy businesses through the established distribution networks and joint partnerships with a view to reinforce its foothold in the food and beverage industry across the Asia Pacific. The CEO is in a strong belief that the strategy of penetration into the Indochina region, comprising Vietnam, Cambodia and Laos, and into Myanmar would offer great potential for dairies operations in Thailand and Malaysia. As far as the export market is concerned, condensed and evaporated milk products are scaled up to grow further. CEO further highlighted that a five-year manufacturing master plan is required in order to coup with the capacity and to meet the growing demand. On the other hand, management has decided to adopt the strategy of further diversifying its business operations in to new sectors and geographical areas.

The property sector is likely to be overshadowed due to negative impact of downturns in the global markets and the recent financial crises took place around the world. For example, Austrade, an Australian government agent to promote trade and businesses has already dropped real estate sector as a sector to be promoted. However, management is striving to earn sustainable earnings from this sector by focusing on residential and commercial properties including integrated commercial real estate models. Accordingly, F&N started a residential development project. The first phase of it is expected to be launched towards the end of 2013. Further, it adopted a strategy of gaining advantages of down turn trends of building raw materials prices which is partly due to financial crisis, by locking in key materials required for constructions.

In the printing and publication sector, F&N responded to the recent changes in the Singapore school syllabus by printing Marshall Cavendish Education series as learning support materials. The management is confident that this print is in the best quality and helps enhance the teaching and learning experience as it supports the digital platforms. One school principal has commented that these textbooks really empower students to be confident users of technology in their learning process and develop skills through social media platforms. This product launch generated great interest from schools and media as well. End of Scenario II End of Question Paper

Institute of Certified Management Accountants of Sri Lanka 15 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination CMA INTEGRATIVE CASE STUDY – (ICS - 405) May 2013 Examination – Marking Grid

Marks A B C D E 1. Management Accounting High level of Good Management Some level of Low level Lack of Sound technical knowledge 20 Management Accounting Management Management Management in Management Accounting Accounting awareness relating to Accounting Accounting Accounting awareness relating case study examples awareness relating awareness awareness to world examples to few case study examples 17-20 11-16 10-14 5-9 0-4 2. Application of theories High level of Good level of Some level of Low level of Lack of application Diverse knowledge clearly application of application of theory application of application of of theory in solving applied in an analytical and theory in an in an analytical theory in an theory in solving problems practical manner in solving 20 analytical manner manner solving analytical manner problems in the the problems in the case in solving problems problems in the case solving problems in case study study. in the case study study. the case study. 17-20 11-16 10-14 5-9 0-4 3. Identifying key issues High level of Good level of Some level of Low level of Lack of recognition Issues to be identified and recognition of key recognition of issues recognition of recognition of of issues prioritized in a logical 10 issues and these and these being issues and these issues manner with a clear being prioritized prioritized logically being prioritized rationale. logically with a

clear rational. 8-10 5-7 3-4 1-2 0 4. Decision making skills High level of Good level of ability Some level of Low level of Lack of ability to Ability to recognize and ability to to recognize and ability to ability to recognize present appropriate 20 recognize and present alternate recognize and recognize alternate solutions alternate solutions and make present solutions and make present alternate alternate solutions effective judgment in a appropriate effective judgment solutions in a logical & rational manner. alternate solutions in a logical and logical and rational and make rational manner. manner effective

judgment in a

logical and rational

manner 17-20 11-16 10-14 5-9 0-4 5. Logical arguments High level of Good level of ability Some level of Low level of Lack of ability to Ability to communicate ability to to communicate ability to ability to communicate effectively with realistic 20 communicate effectively with communicate communicate effectively recommendations in a effectively with realistic effectively with effectively concise and logical manner. realistic recommendations in a realistic recommendations concise manner recommendations in a concise and in a concise logical manner manner 17-20 11-16 10-14 5-9 0-4 6. Communication skills High level of Good style in writing Some style in Poor style in Lack of knowledge Style and synthesis in 10 combining ideas a Management writing a writing a in writing a evaluation of a good report and experiences in Report encompassing Management Management Management to higher management. a professional ideas and Report Report Report manner using recommendations encompassing relevant with some ideas and appendixes appendixes recommendations 8-10 5-7 3-4 1-2 0 TOTAL 100

Institute of Certified Management Accountants of Sri Lanka 16 Level 5 - Integrative Case Study (ICS – 405) – May 2013 Examination